Early Payment Discount Journal Entry

An early payment discount, also known as a cash discount, is offered by a seller to encourage the buyer to pay their invoice earlier than the due date. This discount needs to be recorded in the books of both the buyer and the seller.

Scenario 1: Buyer Recording Early Payment Discount

A buyer purchases goods worth ₹50,000 on credit with terms 2/10, n/30, meaning a 2% discount is available if payment is made within 10 days. The buyer pays within the discount period and takes the discount.

Original Purchase Entry:

Particulars	Debit (₹)	Credit (₹)
Purchases A/c	50,000
To Accounts Payable A/c		50,000
(Being goods purchased on credit)

Entry for Payment with Discount:

Particulars	Debit (₹)	Credit (₹)
Accounts Payable A/c	50,000
To Cash/Bank A/c		49,000
To Purchase Discount A/c		1,000
(Being payment made within discount period)

Explanation:

1. Accounts Payable A/c is debited to clear the liability.
2. Cash/Bank A/c is credited to reflect the cash outflow after the discount.
3. Purchase Discount A/c is credited to record the discount received.

Scenario 2: Seller Recording Early Payment Discount

A seller sells goods worth ₹50,000 on credit with terms 2/10, n/30. The buyer pays within the discount period and takes the discount.

Original Sales Entry:

Particulars	Debit (₹)	Credit (₹)
Accounts Receivable A/c	50,000
To Sales Revenue A/c		50,000
(Being goods sold on credit)

Entry for Payment with Discount:

Particulars	Debit (₹)	Credit (₹)
Cash/Bank A/c	49,000
Sales Discount A/c	1,000
To Accounts Receivable A/c		50,000
(Being payment received within discount period)

Explanation:

1. Cash/Bank A/c is debited to reflect the cash inflow after the discount.
2. Sales Discount A/c is debited to record the discount given.
3. Accounts Receivable A/c is credited to clear the receivable.

Summary

1. For the Buyer:

   • Original Purchase Entry: Records the purchase on credit.
   • Payment Entry: Records the payment and the discount received.

2. For the Seller:

   • Original Sales Entry: Records the sale on credit.
   • Payment Entry: Records the payment received and the discount given.